Recent research on the behavioral effects of taxes has to a large extent focused on the elasticity of taxable income with respect to the net-of-tax rate, i.e., one minus the marginal tax rate. We offer new evidence on this matter by making use of a large panel of Swedish tax payers over the period 1991-2002. Changes in statutory tax rates as well as discretionary changes in tax bracket thresholds provide exogenous variation in tax rates that can be used to identify income responses. We estimate dynamic income models which allow us to distinguish between short-run and long-run effects in a straightforward fashion. For men, the estimates of the long run elasticity of earned income with respect to the net-of-tax rate hover in a range between 0.25 and 0.30. Lower estimates are obtained when other definitions of income are used. For women, the estimates are typically not significantly different from zero. |
